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Last updated: 23 Jun, 2016  

RaghuramGRajan.THMB.jpg Absence of collateral with startups results in bank funding denial: Rajan

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SME Times News Bureau | 23 Jun, 2016
Reserve Bank of India (RBI) Governor Raghuram Rajan on Wednesday said startups lacking collateral is the main reason for not being able to get funded by banks.

"Across the world startups don't have collateral. The banker wants to see what he can take as a collateral which is non-existent for the startups," said Rajan at an interactive session organised by industry body Assocham.

Rajan said those who want to start a taxi service can go take a loan against the fleet of cars they have as security but for startups that is not the case.

He said a bank will lend to a kirana shop owner or an auto repair shop owner but shy away from startups for the reason they do not have assets or collateral.

The governor said a software programme written by a startup hanging around somewhere in the cloud might be hard for a bank to readily understand its value and thereby lead to backing off from funding.

However, Rajan highlighted that startup funding in India exploded 30 to 40 times through a variety of sources like venture capital and angel funding among others.

He said that the government should infuse capital in state-run banks to enable them to support credit growth.

"Governments are sometimes reluctant to infuse bank capital because there are so many compelling needs for funds. Yet, there are few higher return activities than capitalising the public sector banks so that they can support credit growth," Rajan said.

Admitting that capital infusion into weak banks should accompany an improvement in (their) governance, Rajan said given the need for absorbing the losses associated with balance sheet clean-up, the government should infuse its capital quickly.

"If the government cannot buy bank equity directly with cash, it is for it to issue the banks Government Capitalisation Bonds, in exchange for equity. The banks would hold the bonds on their balance sheet. This would tie up part of their balance sheet, but would certainly be capital," Rajan said addressing about 300 members of the Assocham trade body on 'Resolving Stress in the Banking System'.

Disagreeing with the economic survey's suggestion that the RBI should capitalise state-run banks, the RBI governor said getting the banking regulator once again into the business of owning banks with attendant conflicts of interest would be a non-transparent way of proceeding.

"Better that the RBI pay the government the maximum dividend that it can, retaining enough surplus buffers that are consistent with good central bank risk management practice," Rajan said in defence.

In this context, Rajan said the central bank had increased the dividend significantly and paid Rs 1,50,000 crore to the government in the last three years.

"In the last three years, we have paid our surplus to the government. The government should use this amount (from dividend) to infuse capital in its banks. Separately, the government can infuse capital into the banks. The two decisions need not be linked," Rajan pointed out.

Noting that the government was in the process of speeding up the debt recovery process and creating a new bankruptcy system, Rajan said the twin steps would improve the resolution process.

"The first is to improve the governance of public sector banks so that we are not faced with this situation again. The Government, through the Indradhanush initiative, has sent a clear signal that it wants to make sure that public sector banks, once healthy, stay healthy," he asserted.

Similarly, breaking up the post of chairman and managing director, strengthening board and management appointments through the banks board bureau, decentralising more decisions to the professional board, finding ways to incentivise management will help improve loan evaluation, monitoring and repayment.

"The cleaning up of bank balance sheets and restoration of credit growth are vital, as they are related elements in the growth agenda. The government and the RBI are helping our public sector bankers in this difficult but critical task. I know the process is working, so public sector banks will soon be set to finance the enormous needs of this economy once again," Rajan added.
 
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SME deserves much more than existing polocies
Bhagawath Prasad | Thu Jun 23 10:21:07 2016
Sir, Absolutely true that bankers do not fund any enterprise in absence of collateral , they do when government backs and gurantees collateral loans , however , they still backout to take responsibility of knowing the enterprise hence they would simply hunt for good running accounts and request them to open another company and fund them as startup, therefore the idea of giving collateral-free loans are defeated. In case of existing running accounts , if borrower is going thru some difficult times due to many unforeseen situations like delayed payments from large corporates , government tenders,increase in procurement cost , increase in operational cost , mindless competition etc. these are temporary setbacks for business , while SME is busy in controlling all these situations , bankers keep disturbing and raising his bp for having bounced two instalments , threatening that they will declare him NPA ,they bring CIBIL reports and show horror movies for him ,therefore,weak hearted SME with no support from government will collapse and get hammered to be declared dead,many times CIBIL recordings are incorrect due to wrong reporting , thereby ,indirectly damages the SME fund requirements .In my opinion,many times bankers collection agents are like movie villans , SMEs deserve not only 100% collateral-free funding , also must be delinked with CIBIL ratings , SME deserve 50% of their revenue as working capital , in addition to collateral-free term loans capital expenditure.


 
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